Implementation of DAC 6 in Germany

Background

Action 12 of the OECD Base Erosion and Profit Shifting (BEPS) project recommended that the members of the BEPS project should introduce a regime for mandatory disclosure rules for aggressive cross-border tax planning arrangements. Although the report did not set any minimum standards for the rules and was not mandatory, it was unsurprising that, as part of the general trend towards greater tax transparency, the EU Commission and the Member States decided to introduce a disclosure regime for the exchange of information on cross-border tax planning.

In June 2017, the Commission proposed a directive amending the existing Directive on Administrative Cooperation (DAC), building on other recent developments in tax transparency. These developments included the exchange of tax rulings and proposals for the public disclosure of tax information on a country-by-country basis. This directive (DAC 6) was subsequently approved and adopted. It provides for Member States to transpose the directive into national law by 31 December 2019.

The relevant national law entered into force in Germany on 1 January 2020 (the Implementation Act). On 9 March 2020, the German Federal Ministry of Finance (Bundesministerium der Finanzen – BMF) published an official discussion draft for a decree on the Implementation Act (the Draft Decree).

Basic requirements of DAC 6

DAC 6 applies to all taxes levied by a Member State, except for VAT, customs duties, excise duties and social security contributions.

DAC 6 applies to "reportable cross-border arrangements" and requires Member States to introduce rules obliging "intermediaries" (or the relevant taxpayer) to report such cross-border arrangements to the competent tax authority within a specified period (usually 30 days).

Where a Member State receives a report concerning a cross-border arrangement from an intermediary or a relevant taxpayer, that Member State must automatically exchange this report with the other Member States. In addition to this report, a number of further details on the arrangement must be exchanged. These details include, but are not limited to, a summary of the cross-border arrangement, the value of the cross-border arrangement, the persons involved, the details on the relevant Hallmark, the implementation dates etc.

To ensure an efficient exchange of the information between the Member States, it is envisaged that the European Commission will set up a "central register" to which these reports can be sent. In Germany, the German Federal Central Tax Office (Bundeszentralamt für Steuern – BZSt) will be the authority competent for the filing of those reports.

Reportable cross-border arrangements

A reportable cross-border arrangement is an arrangement that affects either more than one Member State, or a Member State and a third country. Furthermore, it must contain at least one so called “Hallmark."

In this regard, the BMF has included in the Draft Decree several examples to illustrate when an arrangement is deemed to be a cross-border arrangement and whether this arrangement is subject to a reporting obligation. The Draft Decree also contains a so called "white list" provided for in the Implementation Act, ie an annex listing transactions in which no tax advantage is to be assumed. However, the first draft of the this “white list” disappointingly contains very few transactions, none of which are generally relevant for corporate taxpayers.

Intermediary

Much concern with DAC 6 related to the identification and reporting requirements for intermediaries. According to the Draft Decree, an intermediary can be any natural or legal person or entity or estate with partial legal capacity, eg partnerships. The Draft Decree also highlights that investment funds may be intermediaries and that, in the case of German contracutal funds, the capital management company (Kapitalverwaltungsgesellschaft) is subject to the reporting obligations on behalf of the fund as intermediary or user (relevant taxpayer). The intermediary is legally defined as the person who markets, designs, organises or makes available for use by third parties a cross-border arrangement or manages its implementation by third parties.
In addition, an intermediary must meet the following requirements in order to be subject to a reporting obligation in Germany:

• tax residence in Germany;
• provision of services related to the arrangement via a permanent establishment in Germany;
• registration in the German commercial register or a public-law register for professional services; or
• registration with a German professional association for legal, tax or consulting services.

If no intermediary with reporting obligations in Germany exists, the user (relevant taxpayer), which meets the above-mentioned requirements, is obliged to report the cross-border arrangement. This is in particular relevant for so-called “Inhouse Cross Border Arrangements”, and also where no “German” intermediary exists, if the user is resident in Germany.

According to the Draft Decree, the mere analysis of a concept designed and planned by a third party will not constitute the design of a reportable cross-border arrangement. Thus, a German tax advisor which only reviews a structure designed by somebody else for his client should not be an intermediary with reporting obligations. Furthermore, the Draft Decree clarifies that anybody who just participates in the realisation of individual sub-steps of a reportable cross-border arrangement does not generally qualify as intermediary. By way of example, it mentions that a bank, which merely grants a loan, which forms part of a reportable cross-border arrangement but is not involved in the marketing, design, organisation or administration of other sub-steps of a tax driven structure, is generally not an intermediary and has no reporting obligations.

Members of the legal, audit and tax advisory professions (eg lawyers, auditors, tax advisors), which are intermediaries, may have restricted reporting obligations due to their duty of professional confidentiality. They generally need to report only the cross-border arrangement, but not the user (relevant taxpayer), if the relevant taxpayer does not release them from the obligation of confidentiality. If no release is granted, the user (relevant taxpayer) must report his identity and that he has used the cross-border arrangement reported by the legal or tax advisor after having received the “Arrangement ID” and “Disclosure ID” from the intermediary. The restricted reporting obligation of such intermediaries does not affect reporting obligations of other intermediaries not being subject to professional secrecy, which must also report the user (relevant taxpayer).

Double Reporting

Where two or more intermediaries are required to report a cross-border arrangement, it is not always necessary for each individual intermediary to report the arrangement to the central registry. The report of one intermediary suffices. However, the intermediary who has not reported the arrangement will need to prove that the arrangement in question was reported by another intermediary or the relevant taxpayer to avoid penalties. The BMF is of the opinion that it is sufficient for an intermediary to receive a correct “Arrangement ID” and “Disclosure ID” issued to another intermediary to have evidence that a report has been made.

Disclosure

The triggering date for an obligation to report is the earliest time when:

(i) the reportable cross-border arrangement is made available for implementation;

(ii) the user (relevant taxpayer) of the reportable cross-border arrangement is ready to implement it; or

(iii) the first step in the implementation has been made.

A cross-border arrangement is made available for implementation for the purposes of (i) above as soon as the intermediary has made documents and information available to the user which the user needs to implement the reportable cross-border arrangement. Mere advertising materials circulated to win instructions will not be sufficient. Actual implementation is not necessary.

Paragraph (ii) above is particularly relevant to “Inhouse Cross-Border Arrangements”, where the triggering date will be the date on which the competent persons approve the implementation.

Paragraph (iii) above would be met, for example, where a user receives a contract from an intermediary regarding a reportable cross-border arrangement which is subject to a condition precedent and he starts first steps to fulfil the condition.

Hallmarks

For a cross-border arrangement to be reportable, one or more “conditional” and “unconditional” DAC 6 Hallmarks must be met.

Conditional Hallmarks require a relevance test (so called Main Benefit Test) which asks if an informed third party can reasonably expect, taking into account all material facts and circumstances, that one of the main benefits of a cross-border arrangement is the achievement of a tax advantage. However, according to the Draft Decree arrangements that have an effect exclusively within Germany shall not be reportable if the expected tax advantage is provided for by law. It is not important whether the tax advantage, which is to be achieved with the cross-border tax structuring, ultimately occurs.

These Hallmarks can be divided into the following categories:

Hallmark (category A): Confidentiality clauses, remuneration linked to the tax advantage and standardised documentation – with “Main Benefit Test”

The Draft Decree provides that a qualified confidentiality clause (eg in a legal opinion on the structuring of a cross-border arrangement) may be a feature of a potentially reportable cross-border arrangement. This includes agreements that prohibit the relevant taxpayer, or another party involved in the cross-border arrangement, from disclosing the tax advantage conveyed by the cross-border arrangement to other intermediaries, including those subject to reporting obligations, or to the tax authorities. According to the Draft Decree, this will also cover clauses which generally allow a disclosure only with the consent of the contracting parties. However, general statutory confidentiality obligations remain unaffected and do not fall within the scope of the Hallmark.

Standardised documentation, ie documentation that can be used for a variety of other transactions in essentially the same way, is also regarded as a Hallmark. In this respect, the BMF mentions, for example, arrangements for financing companies in low-taxed foreign countries if the specific arrangement can be used without significant changes for several taxpayers.

However, the BMF also clarifies that standardised documentation, used exclusively for non-tax purposes, will not generally result in a reporting obligation. In this respect, the Draft Decree mentions terms & conditions of financial instruments, which aim to govern the civil law rights and duties of the issuer and the investor, and investment conditions (Anlagebedingungen) of investment funds, which also serve to protect investors. The same will apply to sales prospectuses describing, inter alia, benefits and risks of an investment.

In an earlier, unofficial draft, the BMF stated that the mere establishment or maintenance of tax-transparent fund structures or semi-transparent special investment funds would not be subject to a reporting obligation in itself. However, this exception is no longer contained in the “official” Draft Decree now published. The establishment of multi-level holding structures, eg for risk protection or to establish structural subordination of creditor groups, was also regarded in the earlier, unofficial draft as generally not reportable, but this exemption is no longer contained in the Draft Decree.

Hallmark (category B): Loss purchase, conversion of income into assets or gifts or other lower taxed or tax-exempt income, circular transactions - with "Main Benefit Test”

An arrangement set up with the purpose of using tax losses (including latent tax losses), which circumvents the statutory restrictions on using tax losses through artificial legal structures, will fulfil the requirements of a Hallmark with a consequent duty to report the cross-border arrangement. However, no reporting obligation will exist if a loss-making enterprise is acquired and if the main activities carried out by this enterprise before the acquisition are continued, even if the acquisition contemplates a reduction in the tax liability of the purchaser.

Additionally, the conversion of income into assets, into gifts or other low-taxed or tax-free income constitutes a cross-border arrangement subject to a duty to report.

Circular transactions in which the value of the assets in question returns to the original tax-payer, after the transaction has been completed, may also be subject to reporting obligations. In this context, it is irrelevant how much time elapses between the individual transactions, as long as they follow an overall plan according to the intended purpose. For transactions which cancel or offset each other within the meaning of the Implementation Act, the BMF is of the opinion that it is not sufficient that this happens as a result of legal requirements, eg a clearing or "liquidation netting" provided for by law in the context of derivative transactions. Purely contractual transactions which credit institutions use, for example, to allocate or offset market or default risks, on the other hand, may in the opinion of the BMF cancel or offset each other and may therefore be reportable. However, they must be subjected to the "Main Benefit Test". Thus, for example, the partial transactions of a securities re-purchase agreement (Repo) may cancel or offset each other in individual cases. However, where the transaction is carried out in order to allocate the underlying market or default risks between the parties and if the risk assessments of the parties are therefore also reflected in the sale and repurchase price, the BMF assumed in the first unofficial draft that the “Main Benefit Test” would not be met, meaning that no report would be required. However, this example is no longer contained in the official Draft Decree now published. Other examples listed by the BMF as generally reportable circular transactions include sale and leasebacks as well as cash pool transactions.

Hallmark (category C): specific cross-border transactions – with “Main Benefit Test”

Arrangements are subject to an obligation to report if cross-border payments, which are deductible, are taxed at a rate of 4% or less. In the opinion of the BMF, it is equivalent to a tax exemption, for example, if taxes in the other country are not levied due to tax losses or other negative income, or if only temporary differences arise eg due to higher depreciation or provisions. In this case, generally, only the first arrangement shall be subject to a report, as opposed to every single payment (eg every purchase price or interest payment). The duty to report also includes cases in which it is the cross-border payments themselves that are tax-privileged, rather than their recipient. For examples of preferential tax regimes, the BMF references the tax regimes identified by the Forum on Harmful Tax Practice (FHTP), saying that it should not matter whether or not they are classified as "harmful" by the FHTP. Thus, for example, a preferential tax regime exists if a state preferentially taxes licence income (so-called patent or licence box), even if the licence income is based on active research and development activities.

Hallmark (category D): undermining reporting requirements or concealing economic ownership – without “Main Benefit Test”

An intermediary who advises his customers to move funds from a jurisdiction where the Common Reporting Standard (CRS) is in force to a jurisdiction that has not implemented the CRS, to ensure that funds are not reported, could become reportable. However, an arrangement is not reportable simply because it involves the transfer of money or assets to countries that have not yet implemented the CRS. This alone should not be sufficient to undermine the regulations of the CRS.

Arrangements which involve various persons, legal arrangements or structures in order to interpose legal or beneficial owners are also subject to reporting obligations, if these arrangements make it possible to conceal the identity of the real beneficial owner and thereby structure a non-transparent chain of ownership.

Hallmark (category E): Transfer price agreements – without “Main Benefit Test”

Hallmark E (1) covers the reporting obligation when using unilateral “safe harbour regulations”.

Hallmark E (2) relates to intangible assets that are difficult to value and for which sufficiently reliable comparables are not available at the time of transfer, and for which the forecast of expected cash flows or derived income is highly uncertain at the time of the transaction, making it difficult to determine the value at the time of transfer.

Hallmark E (3) applies to cross-border transfers of functions and/or risks and/or assets that have a significant negative impact on the projected earnings before interest and taxes (EBIT) of the transferor. This is usually the case if the 3-year forecast of EBIT decreases by more than 50%.

Sanctions

The Implementation Act provides for fines of up to €25,000 in the case of intentional or reckless violations of reporting obligations. However, these sanctions may be avoided in particular if the responsible intermediary or user can provide evidence that he has implemented adequate procedures to comply with DAC 6 reporting obligations.

Transitional Rules

The interface of the BZSt for DAC 6 reporting will only be available from 1 August 2020. Accordingly, the BMF contemplates deferring the filing deadline for the reporting of cross-border arrangements which were or are implemented after 24 June 2018 and before 1 July 2020 and which would, according to the Implementation Act, need to be reported until the 31 August 2020, until 30 September 2020.